Gasoline fuels inflation again: annual rate jumps half-point to 2.2 per cent – Metro US

Gasoline fuels inflation again: annual rate jumps half-point to 2.2 per cent

OTTAWA – Canada’s inflation shot past the two per cent level for the first time in four months in May, as rising gasoline prices boosted the annual rate a half-point higher to 2.2 per cent.

Statistics Canada said the 0.5 per cent hike was the biggest since September, and the one per cent monthly jump from April to May was the most since January 1991.

Private-sector economists had been expecting inflation to accelerate but at a slower pace, forecasting the year-over-year increase at 1.9 per cent in May.

Still, they are divided as to whether Canada now has an inflation problem, as the Bank of Canada suggested last week when it startled markets by bringing an abrupt end to interest rate cuts despite the flagging economy.

“Yes, we are in on a rising trend of inflation and it’s pretty much driven by energy, but the level of inflation is still well within the bounds of the inflation target, and any peak above three per cent next year will be pretty temporary,” said Dale Orr, managing director of Global Insight Canada.

BMO deputy chief economist Douglas Porter said it is not a given that the inflation spike will be temporary, adding that the May number removes much of the doubt about what bank governor Mark Carney will do next.

“Unless the North American economy absolutely falls out of bed, I think we’ve likely seen the low for short-term rates and the next move certainly seems higher not lower,” said Porter. He added there was an outside chance a hike in the overnight rate from the current three per cent could occur as early as September.

That will likely depend on whether the economy recovers quickly, something few, including Porter, expect.

CIBC economist Krishen Rangasamy said the most likely scenario is that the central bank will start moving rates up starting early next year, adding a full percentage point to rates by the end of 2009.

The prospect of higher interest rates was enough to give an immediate boost to the Canadian dollar, which rose 0.26 cents US to 98.51 cents following the 7 a.m. inflation announcement. The loonie was trading at 98.78 at mid-morning.

Last week, the Bank of Canada forecast inflation would rise to about three per cent by the end of the year as high oil prices and rising food prices start filtering into the Canadian economy.

And the price of gasoline was the story in the May inflation report, with food prices starting to emerge as a contributing factor.

Gas pump prices were up 15 per cent from May 2007, considerably more than the already high 11.6 per cent year-over-year rise recorded in April.

And with crude oil hitting record highs during the month, the price of all fuels rose sharply. Fuel oil and other petroleum products shot up 49.3 per cent compared to last May, the largest acceleration in five years. In Quebec, this component was 60.4 per cent higher.

Statistics Canada noted that the annual inflation rate would have remained a modest 1.6 per cent if gasoline were excluded.

Core inflation, excluding volatile items such as fuel and fresh fruit and vegetables, remained at 1.5 per cent.

Meanwhile, food prices, which had been flat or declining only a few months ago, rose 1.9 per cent in May, with baked goods rising 13.2 per cent, the fastest increase since October 1981, reflecting the higher cost of grains.

Rangasamy said temporary factors that had kept food price inflation at bay in Canada, such as the high dollar and stiff grocery store competition, are become less of a factor.

Also adding upward pressure to inflation in May were motor vehicle insurance premiums, homeowner replacement costs, airline tickets and traveller accommodation.

Countering inflation pressures, the cost of buying or leasing a car continued to fall, partly as a result of the strong dollar, down 8.1 per cent in May on an annualized basis.

As well, fresh fruit and vegetables, women’s clothing and computer equipment and supplies were all appreciably cheaper in May than a year ago.

The deceleration in the price of fruits and vegetables, however, was slower than in April, meaning shoppers actually saw an increase in the price of those items compared with the previous month.